C) Increase, increase, decrease
D) Decrease, decrease, decrease
E) Decrease, increase, increase
98. If a bank has a negative GAP, a decrease in interest rates will cause interest income to
__________, interest expense to__________, and net interest income to __________.
A) Increase, increase, increase
B) Increase, decrease, increase
C) Increase, increase, decrease
D) Decrease, decrease, decrease
E) Decrease, decrease, increase
99. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity.
What is the yield to maturity on this security?
A) 12.49%
B) 12.13%
C) 12.30%
D) 2%
E) None of the above
100. The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest
revenues of $275 million and total interest expenses of $210 million. What does this bank’s
earnings assets have to be?
A) $4717 million
B) $3602 million
C) $1115 million
D) $3.790 million
E) None of the above
101. The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest
revenues of $275 million and total interest expenses of $210 million. This bank has earnings
assets of $1115. Suppose this bank’s interest revenues rise by 8 percent and its interest expenses
and earnings assets rise by 10 percent next year. What is this bank’s new net interest margin?
A) 5.83%
B) 7.09%
C) 3.59%
D) 5.38%
E) 7.80%
102. Which of the following is part of funds management?
A) The goal of funds management is simply to gain control over the bank’s funds sources.
B) Since the amount of deposits a bank holds is determined largely by its customers, the focus of
the bank should be on managing the assets of the bank.
C) Management of the bank’s assets must be coordinated with management of the bank’s
liabilities.
D) The spread between interest revenues and interest expenses is unimportant.
E) None of the above
103. If Fifth National Bank’s asset duration exceeds its liability duration and interest rates rise, this
will tend to __________________ the market value of the bank’s net worth.
A) Lower
B) Raise
C) Stabilize
D) Not affect
E) None of the above
104. If Main Street Bank has $100 million in commercial loans with an average duration of 0.40 years;
$40 million in consumer loans with an average duration of 1.75 years; and $30 million in U.S.
Treasury bonds with an average duration of 6 years, what is Main Street’s asset portfolio
duration?
A) 0.4 years
B) 1.7 years
C) 2.7 years
D) 4.1 years
E) None of the above
105. A bank has an average asset duration of 4.7 years and an average liability duration of 3.3 years.
This bank has $750 million in total assets and $500 million in total liabilities. This bank has:
A) A positive duration gap of 8.0 years.
B) A negative duration gap of 2.5 years.
C) A positive duration gap of 1.4 years.
D) A positive duration gap of 2.5 years.
E) None of the above.
106. A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years.
This bank has $250 million in total assets and $225 million in total liabilities. This bank has:
A) A negative duration gap of 1.55 years.
B) A positive duration gap of 1.28 years.
C) A negative duration gap of 3.85 years.
D) A negative duration gap of 1.28 years.
E) None of the above.
107. The duration of a bond is the weighted average maturity of the future cash flows expected to be
received on a bond. Which of the following is a true statement concerning duration?
A) The longer the time to maturity, the greater the duration
B) The higher the coupon rate, the higher the duration
C) The shorter the duration, the greater the price volatility
D) All of the above are true
E) None of the above are true
108. A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market
are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of
weeks. How will this bank’s price change in percentage terms?
A) This bond’s price will rise by 2 percent.
B) This bond’s price will fall by 2 percent.
C) This bond’s price will fall by 14 .02 percent
D) This bond’s price will rise by 14.02 percent
E) This bond’s price will not change
109. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This
bank has total assets of $500 million and total liabilities of $250 million. Currently, market
interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank’s
change in net worth?
A) Net worth will decrease by $31.81 million
B) Net worth will increase by $31.81 million
C) Net worth will increase by $27.27 million
D) Net worth will decrease by $27.27 million
E) Net worth will not change at all
110. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This
bank has total assets of $500 million and total liabilities of $250 million. Currently, market
interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank’s
duration gap?
A) 2 years
B) –2 years
C) 3.5 years
D) –3.5 years
E) None of the above
111. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This
bank has total assets of $1000 million and total liabilities of $850 million. Currently, market
interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank’s
change in net worth?
A) Net worth will decrease by $50.47 million
B) Net worth will increase by $50.47 million
C) Net worth will decrease by $240.95 million
D) Net worth will increase by $240.95 million
E) Net worth will not change at all
112. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This
bank has total assets of $1000 million and total liabilities of $850 million. Currently, market
interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank’s
duration gap?
A) –4 years
B) 4 years
C) 2.65 years
D) –2.65 years
E) 12.65 years
113. A bank has $100 million of investment grade bonds with a duration of 9.0 years. This bank also
has $500 million of commercial loans with a duration of 5.0 years. This bank has $300 million of
consumer loans with a duration of 2.0 years. This bank has deposits of $600 million with a
duration of 1.0 years and nondeposit borrowings of $100 million with an average duration of .25
years. What is this bank’s duration gap? These are all of the assets and liabilities this bank has.
A) This bank has a duration gap of 14.75 years
B) This bank has a duration gap of 15.03 years
C) This bank has a duration gap of 3.55 years
D) This bank has a duration gap of 3.75 years
E) This bank has a duration gap of 5.15 years
114. Which of the following statements is true concerning a bank’s duration gap?
A) If a bank has a positive duration gap and interest rates rise, the bank’s net worth will decline
B) A bank with a positive duration gap has a longer average duration for its assets than for its
liabilities
C) If a bank has a zero duration gap and interest rates rise, the bank’s net worth will not change
D) If a bank has a negative duration gap and interest rates rise, the bank’s net worth will increase
E) All of the above are true statements
115. A bank has an average duration for its asset portfolio of 5.5 years. This bank has total assets of
$1000 million and total liabilities of $750 million. If this bank has a zero duration gap, what must
the duration of its liabilities portfolio be?
A) 7.33 years
B) 4.125 years
C) 7.5 years
D) 5.5 years
E) None of the above
116. A bond has a face value of $1000 and coupon payments of $80 annually. This bond matures in
three years and is selling for $1000 in the market. Market interest rates are 8%. What is this
bond’s duration?
A) 3 years
B) 2.78 years
C) 1.95 years
D) 4.31 years
E) None of the above
117. A bond has a face value of $1000 and coupon payments of $120 annually. This bond matures in
three years and is selling in the market for $1160. Market interest rates are 6%. What is this
bond’s duration?
A) 3 years
B) 5.71 years
C) 1.96 years
D) 2.71 years
E) None of the above
118. A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are
9% and are expected to decrease to 7% in the near future. What will this bond’s price be after the
change in market interest rates?
A) $969
B) $931
C) $1055
D) $854
E) $950
119. A bond is selling in the market for $1100 and has a duration of 4.5 years. Market interest rates
are 5% and are expected to increase to 7% in the near future. What will this bond’s price be after
the change in market interest rates?
A) $1006
B) $1194
C) $1122
D) $1078
E) $1100
120. Which of the following is a true statement?
A) The longer the time to maturity of a security the smaller the duration
B) The lower the coupon rate of a security the smaller the duration
C) For a given duration and change in interest rates, the change in the price of the security will
be larger for a lower starting level of interest rates
D) The duration of a security remains constant no matter the level of market interest rates
E) All of the above are true statements
121. The fact that the rate of change in an asset’s price varies with the level of interest rates is known
as:
A) Duration
B) Convexity
C) Maturity
D) Yield
E) None of the above
122. U.S. banks tend to fare best when the yield curve is:
A) Flat
B) Downward-sloping
C) Vertical
D) Upward-sloping
E) Kinked
123. Carolina National Bank knows that the interest rate on its loans change faster and by a larger
amount than the interest rate on its deposits. What type of risk is this an example of?
A) Default risk
B) Inflation risk
C) Liquidity risk
D) Call risk
E) Basis risk
124. Havoc State Bank has a loan that it fears will not be repaid because the company is going
into bankruptcy. What type of risk would this be an example of?
A) Default risk
B) Inflation risk
C) Liquidity risk
D) Call risk
E) Basis risk
125. The Carter National Bank is worried because it knows that the municipal bonds it has in
its bond portfolio can be difficult to sell quickly. What type of risk would this be an
example of?
A) Default risk
B) Inflation risk
C) Liquidity risk
D) Call risk
E) Basis risk
126. The Jackson State Bank is worried because many of the loans it has made are home mortgages
which can be paid off early by the homeowner. What type of risk would this be an example of?
A) Default risk
B) Inflation risk
C) Liquidity risk
D) Call risk
E) Basis risk
127. A bank is liability sensitive if its:
A) Deposits and nondeposit borrowings are affected by changes in interest rates
B) Interest-sensitive assets exceed interest-sensitive liabilities
C) Interest-sensitive liabilities exceed its interest-sensitive assets
D) Loans and securities are affected by changes in interest rates
E) None of the above
128. Which of the following would be an example of a repriceable asset?
A) Money the bank has borrowed from the money market
B) Cash in the vault
C) Demand deposits that do not pay interest
D) Short term securities issued by the government about to mature owned by the bank
E) All of the above are examples of repriceable assets
129. Which of the following would be an example of a repriceable liability?
A) Money the bank has borrowed from the money market
B) Cash in the vault
C) Demand deposits that do not pay an interest rate
D) Short term securities issued by the government about to mature owned by the bank
E) All of the above are examples of repriceable assets
130. Which of the following would be an example of a nonrepriceable asset?
A) Money the bank has borrowed from the money market
B) Cash in the vault
C) Demand deposits that do not pay an interest rate
D) Short term securities issued by the government about to mature owned by the bank
E) All of the above are examples of repriceable assets
131. Which of the following would be an example of a nonrepriceable liability?
A) Money the bank has borrowed from the money market
B) Cash in the vault
C) Demand deposits that do not pay an interest rate
D) Short term securities issued by the government about to mature owned by the bank
E) All of the above are examples of repriceable assets
132. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. If interest rates do not change in the next ninety days, what is
this bank’s net interest margin?
A) 8%
B) 5%
C) 4%
D) 1.4%
E) Cannot tell from the information given
133. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. What is the dollar interest-sensitive gap of this bank?
A) -$200
B) -$100
C) $200
D) $300
E) $600
134. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the
next 90 days, what would this bank’s net interest margin be?
A) 4%
B) 4.4%
C) 4.6%
D) 2.4%
E) 6%
135. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the
next 90 days, what should happen to this bank’s net interest margin?
A) It should rise
B) It should fall
C) It should stay the same
D) Cannot be determined from the above information
136. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2% in
the next 90 days, what would this bank’s net interest margin be?
A) 3.4%
B) 4%
C) .4%
D) 5.6%
E) 2%
137. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of
which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets
and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2%,
what should happen to this bank’s net interest margin?
A) It should rise
B) It should fall
C) It should stay the same
D) Cannot be determined from the above information
138. The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity
and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are
made annually on this bond. What is the yield to maturity on these bonds?
A) 3%
B) 6%
C) 9%
D) 12%
E) None of the above
139. The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity
and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are
made annually on this bond. What is duration of these bonds?
A) 3.77 years
B) 4.29 years
C) 5 years
D) 9 years
E) None of the above
140. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. If interest rates do not change in the next 90 days, what is this bank’s net interest
margin?
A) .5%
B) .8%
C) 1.8%
D) 5.8%
E) None of the above
141. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. What is the dollar interest sensitive gap of this bank?
A) $400
B) -$1100
C) -$500
D) $1000
E) None of the above
142. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what
would be this bank’s net interest margin?
A) 4.2%
B) 5.3%
C) 5.8%
D) 6.2%
E) 7.8%
143. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what
should happen to this bank’s net interest margin?
A) It should rise
B) It should fall
C) It should stay the same
D) Cannot be determined from the information given
144. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what
would be this bank’s net interest margin?
A) 3.8%
B) 5.4%
C) 5.8%
D) 6.3%
E) 7.8%
145. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which
will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its
liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what
should happen to this bank’s net interest margin?
A) It should rise
B) It should fall
C) It should stay the same
D) Cannot be determined from the information given?
146. Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9% in the Wall
Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000. What price is this T-Bill selling for in the market?
A) $9100
B) $10,000
C) $9950
D) $1900
E) None of the above
147. Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9% in the Wall
Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000. What is the yield to maturity on this T-Bill?
A) 9%
B) .5%
C) 4.5%
D) 9.17%
E) None of the above
148. The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This
bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of
this bank?
A) -1.25 years
B) 0 years
C) 1.25 years
D) -2.25 years
E) None of the above
149. The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This
bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at
6% and fall by 1%. What is the change in net worth of this bank?
A) $11.29
B) $-11.29
C) $0
D) -$22.22
E) $22.22
150. The interest rate on one year Treasury Bonds is 5%. The interest rate on five year Treasury
Bonds is 7.5%. The interest rate on ten year Treasury Bonds is 10%. What is true about the
yield curve?
A) It is upward sloping
B) It is downward sloping
C) It is a horizontal line
D) Cannot be determined from the information given